UPDATE: Nov. 5, 2021: Vistra sued the Federal Energy Regulatory Commission on Thursday, seeking to overturn the agency’s September decision to approve new offer cap rules. The company and others contend the rules will prevent market participants from making bids that fully reflect their financial risks.

The generation company filed the suit in the U.S. Court of Appeals for the District of Columbia Circuit the same day FERC said requests to reconsider its decision were effectively denied because a 30-day deadline passed without the commission responding to them. FERC said it still plans to address the rehearing requests.

Vistra plans to ask the appeals court to take up the case on a fast-track review. The company expects other parties will support the expedited review. PJM is slated to hold its next forward capacity auction on Jan. 25.

Dive Brief:

• PJM Interconnection and generators like Exelon, Calpine and Vistra, separately asked the Federal Energy Regulatory Commission Monday to reconsider its recent approval of offer cap rules they said unfairly limit power plant owners' ability to make capacity market bids that fully reflect their financial risks.

• The method for setting offer caps FERC approved Sept. 2 will lead to "over mitigation" of capacity bids, will be burdensome to administer and will spark disputes that disrupt the grid operator's capacity auctions, PJM said in a rehearing request.

• FERC's decision to cap bids at a "unit-specific avoidable cost rate" will force many generators to offer "zero" bids in PJM's capacity auction in January, putting downward pressure on capacity prices and possibly leading to power plant retirements, according to Bill Dugan, director of wholesale optimization services for Customized Energy Solutions (CES), an energy consulting and service firm.

Dive Insight:

PJM's offer cap rules are a key component of its annual capacity auctions, which aim to make sure the grid operator has adequate power supplies three years into the future. The rules aim to prevent market participants from using market power to drive up prices.

Responding to complaints filed by the PJM's market monitor, Monitoring Analytics, as well as ratepayer advocates and large energy users, FERC said in March the grid operator's default "market seller offer cap" needed to be revised (EL19-47, EL19-63).

In its September decision, FERC ordered PJM to adopt a proposal from Monitoring Analytics that requires power plant owners to get the market monitor's approval for bids above zero, unless the planned offer meets certain conditions. The requests are based on the specific details of the power plant behind the bid. By offering a zero bid, a generator accepts the capacity auction clearing price.

"PJM remains concerned that the unit specific review of all resources may prove to be a significant overreach to address the commission's concern and therefore lead to over-mitigation of the market," the grid operator said in its rehearing request.

So far the market monitor has rejected all unit-specific offer caps for the upcoming auction, according to PJM, which runs the grid and power markets in 13 Mid-Atlantic and Midwest states and the District of Columbia. Those disputes will likely have to be settled by FERC, potentially disrupting the pending auction, the grid operator said.

FERC failed to provide due process when it expanded without notice the scope of the complaints to resources that had never before been subject to the market seller offer cap, PJM said.

PJM also asked FERC to clarify that demand response and energy efficiency resources remain exempt from the offer cap and that the rules apply only to existing resources.

Generators blasted FERC's decision, saying the new requirements fail to reflect the risks and costs they face.

"The commission should not be displacing unit owners' reasonable business judgment," Exelon and Public Service Enterprise Group, companies with nuclear power plants, said in joint comments. "Sellers' only alternative is to retire — but further nuclear plant retirements run counter to efforts to decarbonize our power grid."

The FERC-approved offer cap mechanism will deprive resource owners of the chance to earn a return on their investments, in violation of the Federal Power Act and the U.S. Constitution, Vistra said.

In a joint filing, LS Power Associates, Talen Energy Marketing, the Electric Power Supply Association and the PJM Power Providers Group also asked FERC to reconsider its decision.

Before FERC's decision, generating resources had a relatively flexible offer cap, but many now face a zero offer cap, CES's Dugan said Tuesday.

"It essentially puts a lot of resources in the position where they're probably naturally going to have to be offering zero," Dugan said. "Theoretically, it will put some downward pressure on prices."

Lower capacity prices will squeeze marginal power plants financially, possibly pushing some to retire, according to Dugan.

In PJM's last capacity auction, held in May, capacity prices for most of the the grid operator's footprint fell to $50/MW per day from $140/MW per day in the previous auction in 2018. Since the auction, NRG Energy announced plans to shutter plants totaling 1,600 MW in PJM's footprint while GenOn Holdings said it would retire 2,420 MW and Vistra decided to close a 1,300-MW plant.